It's some basic marketing "neuro-programming"; They often add that "popular choice" for people who have no clue about what they're buying but want the safe choice. That is, I believe, the market that fall for this in general.
The premium and cheapest options are often the "sidekicks" that will influence the final choice; the cheapest choice is expensive when compared to the middle one (a.k.a. popular choice) in term of value, and the premium one is too risky for a quick purchase. That creates a funnel effect toward the product the provider wants to sell easily and for which the profit margin is still good. That tactic is not meant to influence people who take their time before getting their credit card number in the checkout, it's meant to affect people who need to take a decision quickly and don't want to make a mistake. If you'd buy a car but had absolutely no knowledge of the 3 brands, you'd probably also go for the middle choice unless you can easily afford the premium option.
I've seen a lot of websites where the wholesale premium option has purchase limits or is said to be "unavailable due to high demand" (it's bologna as you guess); for some products that "middle" best choice option is the one that is the most profitable.
Does it work?
On a certain market as I mentioned above, I think it does.
Regarding marketing studies on this, I guess it works exactly the same as putting a sticker "BIG SAVINGS ONLY TODAY" written yellow on red on a pickle jar that is 1 penny cheaper than the normal price. Some customers can be gullible, naive or lead by their emotions, especially when they don't research first what they need to buy. There's a disconnect with their critical thinking when that happens and marketers love it.
Is it annoying on layouts?
Bah. Ok I'll admit it's not fun on web projects.
To add some balance, I like to use ribbons or badges for this kind of thing, or add other "titles" to the 2 other groups (eg. Starter, Best Choice, Premium OR Trial, Most Popular, Best Savings, etc.) But I think the badges work best and you can add them on the images if you have any.